CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
A firm has sales of ₹10,00,000, variable cost of ₹6,00,000 and fixed operating cost of ₹2,00,000. What is its degree of operating leverage (DOL)?
The degree of operating leverage is 2.00. Contribution is ₹4,00,000 (sales less variable cost) and EBIT is ₹2,00,000 after fixed costs, so DOL equals contribution divided by EBIT, giving 2.00.
- A1.50
- B2.00Correct
- C2.50
- D5.00
Explanation
Contribution = 10,00,000 − 6,00,000 = ₹4,00,000. EBIT = 4,00,000 − 2,00,000 = ₹2,00,000. DOL = Contribution / EBIT = 4,00,000 / 2,00,000 = 2.00. Using sales over EBIT (5.00) is wrong because it ignores variable cost.
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